akistan, a heavily indebted country with unsustainable external loans and their servicing, has been struggling hard to overcome the rising pressures on its already insufficient and fast-depleting foreign exchange reserves. Efforts are under way to resist further depreciation of the rupee that directly affects GDP to foreign debt, local debt ratios and inflation.

However, over the years, our policymakers have been treading a dangerous path of utilising the scarce foreign exchange reserves to support/ stabilise (artificially) the local currency value. This imprudent strategy has resulted in a sharp and dangerous decline in the value of our currency.

The existing low foreign exchange reserves, high demand for dollars and political uncertainty have left the rupee in a free fall against dollar and other foreign currencies.

On the other hand, adoption of a bookish approach of countering the historic high inflation by raising policy rates has also proved unfruitful for the last year and a half. During this period, the State Bank of Pakistan (SBP) raised the policy rate by more than any other central bank in South Asia, i.e., from 7 percent to a whopping 21 percent.

Despite this phenomenal raise, our currency has lost 55 percent of its value since April 2022. Notwithstanding such a high rise in policy rate, inflation continues to be out of control. The depreciation-inflation spiral is keeping real interest rates in the negative. Latest figures released by the Pakistan Bureau of Statistics show that for the week ending on April 6, inflation was 44.9 percent on a year on year (YoY) basis.

With forex reserves depleting at an alarming pace and a substantial amount of foreign debt-based liabilities maturing in the near future, policymakers have taken aggressive measures to control the outflow of dollars by imposing import restrictions and other administrative controls to mitigate pressures emerging on the balance-of-payments front.

The available data provides some interesting details about the effectiveness of such measures. In countries like Pakistan, the approach has backfired in several ways. Our two main sources of inflows are exports and remittances. That our exports are largely dependent on imports, remains undeniable. Thus, any coercive measure to curb imports directly affects exports.

This can easily be corroborated with the help of official statistics. As a result of import contraction, the current account for July-February of the fiscal year 2023 posted a deficit of $3.9 billion as against a deficit of $12.1 billion last year. This was mainly due to imports (FOB basis) declining by 21 percent during July-February, reaching $37.4 billion compared to $47.3 billion last year during the same period. Similarly, on the flip side, during July-February for FY 2023 exports (FOB basis) dwindled by 9.7 percent and reached $18.6 billion as compared to $20.6 billion last year.

It can be construed that import restrictions and capital controls are insufficient and ineffective to prevent outflow of funds and depreciation of the currency in the medium or long term. This has created distortions in the economy.

Policymakers need to realise that these measures cannot work in isolation. Given the administrative incompetence of government departments, the hundi and hawala (alternative unregulated remittances system) market is flourishing. Now it is not only being used to settle import-based payments routed through unofficial channels but also influencing home remittances.

Home remittances are the undeniable financial lifeline for our ailing economy and critical to narrowing down the current account deficit and sustaining our forex position. During the first eight months of financial year (FY 2023), workers’ remittances declined to $18 billion, approximately 10 percent less than $20.2 billion in the same period last year.

Experts believe that due to the availability of better exchange rates in the hawala market, remitters prefer using informal means rather than formal banking channels.

The recent World Bank publication, South Asia Economic Focus (Spring 2023), has also discussed this phenomenon from a regional perspective, noting that: “Artificially strong official exchange rates led to widening parallel exchange rate gaps in Bangladesh and Pakistan. As the official (interbank) exchange rate was set at an artificially strong level inconsistent with the market, the gap between the interbank and the market (curb) or informal exchange rate widened in Bangladesh and Pakistan. In Bangladesh, where the exchange rate gap between the interbank and the unofficial rate is historically between 0 percent and 2 percent of the interbank rate, it reached an average of 12 percent in August 2022, while the gap between the interbank and the curb rate, which is more reflective of the real market rate, reached 18 percent (of the interbank rate). In Pakistan, where in recent years the gap between the official and the market rates was close to 0, the exchange gap reached 4 percent of the interbank rate in January 2023. As a result, the interbank market became dysfunctional, as dealers were unwilling to sell US dollars at the overvalued rate.”

In Pakistan, there were occasions when in a single day, the rupee witnessed one of the worst losses in history against dollar. For instance, on January 26, it lost parity value by approximately Rs 25, equal to a 10.63 percent decrease in a single day. Similarly, on March 2, the rupee fell by 7.13 percent and lost Rs 18.98 against the dollar in the interbank in a single day.

Considering the situation, it can be construed that import restrictions and capital controls are insufficient and ineffective to prevent outflows of funds and depreciation of the currency in the medium or long term. This has created distortions in the economy and promoted parallel avenues that discourage formal business activities.

It is time for the government to take necessary measures to streamline fiscal affairs. The prime minister and the federal finance minister claim that they have averted default and are trying their best to revive the economy. However, it should not be ignored that our debt-servicing as well as other liabilities on the external front for the next few years are over $30 billion. Therefore, the revival of the economy and creation of room for giving relief to the masses will not be possible without fundamental structural and fiscal reforms.

There is an urgent need at the national level to mobilise tax and non-tax revenues and drastically cut unproductive expenses to stop the colossal waste of taxpayers’ money.

Dr Ikramul Haq, an advocate of Supreme Court and writer, is adjunct faculty at the Lahore University of Management Sciences (LUMS)

Abdul Rauf Shakoori is a corporate lawyer based in the USA